As we all should be aware by now Puerto Rico is effectively bankrupt. And as the tragedy of the situation is the law doesn’t allow Puerto Rico to actually go bankrupt. This is something that Congress really should sort out and they really should have done so before this weekend, when Puerto Rico has announced that it simply will not be able to pay a maturing bond. It will be in at least partial default as a result. Which is actually where all the real problems start: because there is no obvious manner in which a default can be dealt with. And that’s one of the most important parts of this whole capitalism thing. We know very well there will be mistakes made. True, some of them will be made by politicians splurging borrowed money they’ve not had to tax out of their voters, others of them will be made by business people just getting matters howlingly wrong like opening a fur bearing trout farm. But we must endure the mistakes because the experimentation is what allows us to find out those few things that do work. The importance is thus how well and how quickly do we clear up the mess of the mistakes. It is vastly better that we have a possibly unfair, conceivably even unkind, solution which is quick and certain than that we have the failure just festering away at the bottom of the economy. Better, if you like, to burst the boil than allow it to develop into septicemia (if that’s not too mixed a medical metaphor).
But that’s not quite what Congress did:
House members left Washington Friday for a week-long recess without taking action on a fiscal rescue for Puerto Rico, days before the territory’s development bank is set to default on a payment to bondholders and deepen the economic crisis there.The Government Development Bank has said it would default on nearly $390 million due May 1, a move that could unleash a cascade of problems throughout the Puerto Rican financial system.
There’s some who think the problems don’t really start until July 1 but that’s not really the way these things work:
Puerto Rico’s approximately 18 debt-issuing entities have debts — approximately $72 billion — they cannot repay. The Government Development Bank might miss a $422 million payment due in May, and the central government might miss a $2 billion payment in July. Congress will not enact a “bailout,” meaning an infusion of U.S. taxpayers’ money.
Why it won’t work that way is because of things like this:
A default would mean that Puerto Rico’s access to capital markets would shut down, which would terminate the $1.2 billion to $1.4 billion in tax revenue anticipation notes the government issues yearly, economist Gustavo Velez said.
As Argentina recently found out those parri passu clauses can be a real bind. Being in default on one bond issue can mean that you can’t pay anyone. And if you can’t do that then you can’t even issue covered bonds (ie, bonds “covered” for their repayment by a specific revenue stream).
All of which leaves that large problem which Congress really should have tried…and succeeded of course….to sort out. And there’re three points that need to be made in order to reach a solution.
The first is that the mistake (s) has (have) already been made. The politicians borrowed too much money, spent it on unproductive things and now they can’t pay it back. Sure, it would be lovely to stick them in the stocks, make fun of them, wouldn’t it be joyous to garnishee their pensions (not all of those suggestions are entirely serious) but we do have to start from the point that the errors have already happened. There is nothing that can be done which will make this problem go away. If someone or somewhere doesn’t have enough money to pay their debts then those debts just aren’t going to be paid.
The second is that someone, somewhere, is going to lose that money which cannot be repaid. And there’re only two possible groups here. Puerto Rico doesn’t have the money, the economy there won’t stand a higher taxation burden to repay it over time and sadly the pensions of those now retired politicians who spent it all aren’t large enough to cover the tab. That means that either the general taxpayer to Uncle Sam is going to have to pick up the tab or those holders of those bonds are going to have to. There’re just no other groups hanging around this particular corner that we can stick with the bill.
My preference would be that it’s the bondholders. Not because they’re capitalist plutocrats (most of them aren’t, PR bonds are widely held among the general population) and not because I approve of governments spending the heck out of all the money they can borrow. But on the simple grounds that that’s capitalism folks. You lend money to people who cannot pay it back you lose it. And that the spendthrifts are politicians isn’t a bad lesson to learn. The more people who do learn it the more that lesson will be a brake upon the next group that intends to exhaust the Treasury.
The third is that that is only the immediate choice. After that it’s still going to be necessary to revitalise the island economy. And that’s going to cause an even greater catfight than the current one over who gets to lose money. Because the two sine qua nons of getting that domestic economy sorted out are going to mean riding roughshod over two of the great shibboleths of currently fashionable public policy. The first is the minimum wage, the second is the
Both productivity and median wages are much lower in Puerto Rico than they are on the mainland. If it were true that a higher minimum wage grows the economy by growing aggregate demand then of course PR should be very rich indeed. Because PR has the same minimum wage level as the mainland. In fact, it’s rather higher today as a portion of the local median wage than the $15 an hour one mooted will be on the mainland. Thus, if those predicted delightful effects of the higher minimum wage were true then we’d already be seeing them in Puerto Rico. This isn’t quite the case as you can tell from the fact that we’re discussing the bankruptcy of the place. PR needs a lower minimum wage, one more in line with local productivity and local median wages. The Jones Act states that, with certain exceptions, transport between American ports must be done in American, built from American steel, ships crewed by Americans. This started out as a system of ensuring that the country had a merchant marine in times of war and has degenerated into a nice protection scheme for US steel, shipbuilding and seamens’ unions. I would scrap the whole thing but at the very least Puerto Rico needs to be exempted from this requirement. For the island is competing with all the other Caribbean islands that are not so crippled by transport costs. And it’s not just me saying these two things: at least one report done at the request of the local government has said the same thing.
The economy of Puerto Rico needs to be freed from some of the shackles that Federal law places upon it. But that’s for the longer term: in the short the only important decision is who gets to lose the money already lost? The people who lent it or the US general taxpayer? There isn’t anyone else out there with the resources to cover the bill for those past mistakes. Thus it’s those two groups, in some formulation, who are going to lose their money. And it really might be a good idea if Congress managed to get this sorted out because as a result of past decisions there they’re the only people with the power to do so. Either change the law so the island can go bankrupt, thus sticking it to the bondholders, or vote the resources for Puerto Rico to pay its debts. There ain’t no one else around.
Congress Should Have Fixed Puerto Rico's Looming Default But Went Home Instead
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